Monday, November 24, 2014

Chicago Bridge and Iron Falls 5% on Goldman Downgrade

On November 24th Goldman Sachs issued a sell rating on Chicago Bridge and Iron (CBI).  This news pushed the stock down 4.96% to $54.26.  There was also a much higher volume of options being traded, with a large increase in put options, probably a reaction to the Goldman downgrade.  The bank did not give word on what caused the rating change from neutral to sell.

With a large amount of short interest in the stock, I look forward to a short squeeze after the company reports what I believe will be a strong fourth quarter and solid full year 2014.
CBI continues to be undervalued and maintains strong growth prospects.  The stock is only slightly below our buy-in price, and maintains a consensus target price with 25% upside.

Friday, November 14, 2014

Cisco Reports 1Q15 Earnings/ Sell Thesis



On November 12, 2014 Cisco Systems Inc. reported 1Q15 earnings after market close at 4:05PM.  Cisco beat analyst estimates by $80MM with revenue of $12.24BB.  Cisco did not meet my expectations of $12.47BB.  Cisco also reporting non-GAAP diluted earnings of $0.54 per share, beating analyst estimates by a penny, but missing my optimistic estimates of $0.63.  Cisco returned close to $2BB to shareholders through dividends and share repurchases.  Cisco also announced their CFO Frank Calderoni would step down at the end of the year.

During the first quarter of shipments, Cisco more than doubled its paying customer’s adoption of their new ACI controller that enables automation and programmability of the network.  The Nexus 9000 and the ACI have seen extremely strong demand.  Product orders in EMEA was a big revenue driver this quarter.  EMEA product orders had growth of 6%; U.K. product orders were up 20%, Germany’s were up 6%, and South Europe’s were up 20%.  Excluding service provider growth, growth in the U.S. was 12% and U.S. federal grew 34%.  U.S. service provider however declined 18% which Cisco previously warned could be an issue.  Cisco also faced pressure in Asia-Pacific, Japan, and China which declined 12% and China which was down 33%.  Routing also hurt Cisco as sales were down 4% as a result of lower CapEx spending by major service providers and challenges in EM.  Switching sales were up 3% which represents the first quarter in the last three that Cisco had growth in that segment.

Cisco has also taken numerous steps to differentiate themselves in the highly competitive cloud computing space.  They have taken their ideas of “Internet of Everything” and interconnectivity and created a cloud structure that can unify private, public, and hybrid clouds.  Different from big competitors like Google, Rackspace, and Amazon, Cisco allows its customers to seamlessly move their work between clouds.  This will also allow Cisco to package their software as part of the cloud solution which was one of my main theses.  As a result of Cisco taking the initiative to offer solutions (hardware packaged with software), services revenue grew 5% this quarter.  Services now represents over 23% of Cisco’s revenue.

Following Cisco’s great quarter we have decided to take our money and run.  Cisco provided disappointing guidance and cited issues that I foresaw and believe will stagnate their growth.  Cisco expects $0.50-0.52 EPS and revenue growth of 4-7% which are below consensus as well as my estimates.  They also face severe headwinds in their service provider segment and in emerging markets.  Cisco has fulfilled all my theses which include making numerous acquisitions, returning tremendous value to shareholders, offering software and hardware packaged as solutions, and cutting operating expenses.  Although Cisco has been good to us returning 20% on two occasions, and a generous dividend, I don’t see much potential for future growth so we will exit our full position.


Wednesday, November 12, 2014

Fossil Group jumps 8% on great Q3 earnings

There were lots of positives that Fossil announced in their recent earnings call. The biggest driver of the jump in their share price was that they signed a renewal contract with Michael Kors (MK). This is significant for the company because MK has been a huge driver of sales, especially in the US, but is also now taking large strides to expand internationally. The contract was set to expire at the end of 2015 which left investors very worried since MK has recently been about 22% of Fossil's sales. This contract renewal is a very positive sign that addresses one of the biggest risks that faced the company.

Aside from renewing this contract Fossil still reported a great quarter in sales. This was needed after a lackluster 2nd quarter which saw US sales growth drop down to 2% and a 410-basis-point drop in operating margins. The third quarter showed a return to growth in the US with wholesale sales increasing 6%. This 6% is significant because Fossil Group already has a significant market share of watches in the US with over 40% of the market. While US growth will be small compared to internationally, there is still room to grow in jewelry and handbags.

Where the company has expected large growth is in Europe and Asia, and this quarter they delivered with Europe wholesale increasing 15% and Asia-Pacific increasing 11%. Also Direct-to-consumer sales increased 11% due to store expansion internationally which was slightly offset by a decline in the US.

Overall Fossil had a great quarter with the renewal of the Michael Kors contract and addressing some issues when it comes to operating margins as well as sales growth in the US. One of the soft spots for the quarter was their sales growth in China. Although it still grew double digit in sales it was less then expected considering how large their sales growth has been there of late, with growth being as high as 50% in 2013. They attribute this to a softening retail environment but are still working to grow their infrastructure in China since it has is a large growth potential for the company. Fossil currently has a small market share in China which is a bigger watch market then the US that is only expected to grow.

Thursday, November 6, 2014

US Ecology Q3 Earnings

          US Ecology reported their Q3'14 earnings yesterday after the market closed.  Their top line was reported at $170.9 million which beat estimates of $157.8 million.  Their earnings per share was reported at $.65 compared to estimates of $.48.  Their robust earnings were led by growth within landfill volumes in the legacy business and double digit growth within their base business. In addition revenue realized from the Environmental Quality Company was around $111.3 million which was stronger than expected.  This was primarily driven by strong treatment and disposal volumes received. 

         The revenues and earnings per share beat my estimates of around $150 million and $.50 respectively.  US Ecology increased their 2014 FY EPS guidance from 1.70-1.80 to 1.90 to 1.97 which is in line with what I had originally projected.  One of my investment thesis points was that the experience management team within US Ecology will help increase EQ's margins and overall drive growth within bottom line growth in which it did for the third quarter.   The integration within the two companies has been efficient and quicker than expected and therefore they are currently ahead of schedule.  The stock price was down about 163 basis points today, therefore I do not believe the market has yet to fully appreciate the strong guidance and success from US Ecology's Q3'14 earnings report.  The stock is currently trading around $46 and I re-iterate my price target of $58.21 and will continue to monitor margin improvement and the efficiency within the integration process. 

Tuesday, November 4, 2014

Integra LifeSciences 2014Q3 Earnings


IART released their 2014Q3 earnings yesterday, November 3, following the closing bell.

IART reported $229.7MM in revenue, representing a 7.7% or $16.5MM YOY increase, although missing analyst estimates by about $2MM.  The main revenue driver, as we expected, was the US Neurosurgery and US Extremities segments, which consists of the DuraSeal product line, Bilayer Wound Matrix, and a number of other surgical tools.  Net income was positive this quarter with $9.8MM, or $0.30 per share, compared to IART’s net loss of $30.3MM a year prior. 

IART invested a notable $8.8MM in capital expenditure this quarter and CEO and President, Peter Arduini, announced a new portfolio realignment strategy to promote IART’s long term growth.  This is a plan to spin off its Spine business to its own publicly traded company, specifically focused on the marketing, selling, and development of its spine business. 
After specific charges due to the spin-off, IART lowered their FY2014 GAAP earnings expectations from $1.06 to $0.81 (bullish), but plans to maintain their diluted earnings estimates of about $2.88.

Sunday, November 2, 2014

Invesco Ltd. Q3-14 Earnings


Invesco Ltd. reported Fiscal Q3 EPS of $.64 beating consensus of $.62.  This represents an increase of 16.4% YoY. The stock is currently trading at $40.47, up 1.99% in After-Market trading.

Total operating revenues for the quarter were $1.3B compared to our estimates of $1.2, reflecting an increase of 11.96% from last year’s Q3. Ending AUM for the quarter were $789.6B, up 5.92% from the same quarter last year. Long term net flows are at $6B representing a 186.96% increase from $-6.9B reported last quarter. Net revenue rose 11.9% from year ago to $913.7 driven mainly by higher investment management fees which are up 14.18% to $1B from $938M Q3-13.

The company is showing a positive outlook on their fundamentals after the departure of Neil Woodford, a longtime fund manager and praised investor, who left the company in April. Woodford departure led to a long term outflow of ($6.9B) in Q2-14 from a $5B in Q3-13. The company since has gained its client confidence up resulting in LT net flows increase of 186.96%.

Thursday, October 30, 2014

Visa Inc. Q4 Earnings & Sell Thesis; Strong transaction growth and increased share buyback propel stock

Visa Inc. reported Fiscal Q4 EPS of $2.18, beating street consensus of $2.11 by 3.3%. This EPS figure is up 17% YoY, from $1.85 in Q4 fiscal 2013. This marks Visa’s fourth consecutive earnings beat. The stock is currently trading at $234.34, up ~9% from yesterday’s close- pushing to our price target.

Total net operating revenues for the quarter were $3.3BB compared to our estimates of $3.6BB, and an increase of 8.6% from the prior year’s quarter. Of this, Q4 service revenues came in at $1.5BB (up 8% YoY) and data processing revenues were $1.3BB (up 4% YoY). Total processed transactions for the quarter were $16.9BB, up 9% from the prior year, very much in line with the original investment thesis. Growth in emerging markets continue to drive top line growth.

The company continues to show effort in returning cash to shareholders. Visa authorized a new $5B share repurchase program, in addition to the previous 20% quarterly dividend increase.
After updating our model and checking our investment thesis, we believe the market has fully priced in future revenues that were being discounted originally, and the stock is now fully valued.


We are booking a capital gains return of 16%, excluding dividends, which would bring us closer to the 20% originally forecasted.  We are pleased with Visa being a strong part of our portfolio, and will continue to monitor the stock for another buying opportunity.